Edited version of your written advice

Authorisation Number: 1012985494522

Date of advice: 18 March 2016

Ruling

Subject: Capital gains tax

Question 1

Are you fully exempt from paying capital gains tax on the disposal of your ownership interest in the property which you inherited from your relation?

Answer

No.

Question 2

Are you fully exempt from paying capital gains tax on the disposal of your ownership interest in the property which you inherited from your sibling?

Answer

Yes.

Question 3

Are you partially exempt from paying capital gains tax on the disposal of your ownership interest in the property which you inherited from your relation?

Answer

Yes.

Question 4

Can your share of certain property expenses form part of the cost base for capital gains tax purposes?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commences on:

1 July 20YY.

Relevant facts and circumstances

The deceased and their spouse acquired property before 20 September 1985. The property was their family home since that date.

The deceased's spouse passed away after 20 September 1985.

The deceased passed away in 20XX.

The property was left to you and your siblings in equal shares.

Your siblings had lived in the home their entire lives. They continued to live in the home after their parent passed away.

The property was never used for income producing purposes.

The property was not your principal place of residence.

One of your siblings died in 20YY. Their ownership interest in the property was split between you and your other sibling.

The property was sold in 20YY. There were more than two years between your parent's passing and the settlement date of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 102-20

Income Tax Assessment Act 1997 - Section 128-20

Income Tax Assessment Act 1997 - Section 118-195

Income Tax Assessment Act 1997 - Section 118-200

Income Tax Assessment Act 1997 - Section 118-205

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place and either a capital gain or a capital loss results. Any capital gain is added to any other assessable income for the relevant year and is then taxed at the appropriate marginal tax rate. A capital loss can be offset against other current year capital gains or carried forward indefinitely to be offset against future year capital gains.

The most common CGT event is known as CGT event A1 and generally occurs whenever there is a change in ownership of a CGT asset from one party to another.

CGT and deceased estates

Section 128-20 of the ITAA 1997 explains that where a taxpayer dies, there are no CGT implications where an asset passes to the legal personal representative or beneficiary, but CGT may apply when the asset is subsequently disposed of. Assets forming part of the deceased estate are deemed to have been acquired by the representative or the beneficiary at the date of death of the deceased.

You therefore acquired your one third ownership interest in the property on the date your parent passed away. You also acquired another ownership interest in the property on the date of your sibling's passing. For CGT purposes, these two interests in the property are treated separately. Therefore, any capital gain or loss needs to be calculated separately for each interest. For the purposes of this ruling, the interest which you acquired from your relation at the time of death will be referred to as CGT interest 1 and that which you acquired upon your sibling's passing will be referred to as CGT interest 2.

Full main residence exemption

Subsection 118-195(1) of the ITAA 1997 states that if you owned a dwelling in your capacity as trustee of a deceased estate (or if it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if:

• the property was acquired by the deceased before 20 September 1985; or

• the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income.

and

• your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances); or

• the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

a) the spouse of the deceased immediately before the death; or

b) an individual who had a right to occupy the dwelling under the deceased's will; or

c) if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

CGT interest 1

The property was purchased by the deceased and their spouse prior to September 1985. When the deceased's spouse passed away after 20 September 1985, their pre-CGT interest of the property passed to the deceased and became a post CGT interest of theirs. They therefore held immediately before their death 50% of the property as a pre-CGT asset and 50% of the property as a post CGT asset. You acquired both of these interests at the time of their death.

You did not dispose of your ownership interest within two years of the deceased's passing. Although your siblings also inherited ownership interests in the property as beneficiaries of the deceased estate and continued to live in the home, because there was no explicit right of occupancy for them under the deceased's will and the property was not your own main residence, a full main residence exemption is not available to you.

CGT interest 2

With regards to CGT interest 2, your sibling's interest in the property is deemed to have been acquired by them on the date of your relation's passing. Their ownership interest was therefore a post CGT asset which transferred to you on the date of their death in 20YY.

The property was their main residence and was not being used to produce assessable income. Because the property was sold within two years of their passing you are fully exempt from paying CGT on this interest in the property.

Partial exemption

Although you are not eligible for a full main residence exemption for asset 1, section 118-200 of the ITAA allows for a partial exemption (or no exemption) if:

(a) you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) section 118-195 of the ITAA 1997 does not apply.

You calculate your capital gain or capital loss using the formula:

Capital gain or capital loss is the amount that you made from the disposal of the dwelling (before applying any main residence exemption).

Non-main residence days is the sum of:

(a) if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of one of the following:

• a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

• an individual who had a right to occupy the dwelling under the deceased's will, or

• you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

Total days is:

(a) if the deceased acquired the ownership interest before 20 September 1985, the number of days from the deceased's death until you disposed of your ownership interest; or

(b) if the deceased acquired the ownership interest on or 20 September 1985 - the number of days in the period from the acquisition of the dwelling by the deceased until you disposed of your ownership interest.

Application to your circumstances

Because your relation had both post and pre-CGT interests in the property prior to their death; the original ownership interest in the property and that which was inherited at the time of the spouse's death (hereafter referred to as interest 1a and interest 1b respectively), the partial exemption needs to be calculated separately for each interest.

CGT interest 1a

For CGT interest 1a which was acquired by your parent prior to 20 September 1985, the 'total days' are equal to the number of days in the period from their death until you disposed of your ownership interest in the property (the settlement date). Because you did not treat the dwelling as your own main residence, and it was not the main residence of an individual who had an explicit right to occupy the dwelling under the deceased's will, the 'non-main residence days' are also equal to the number of days from the deceased's death until you disposed of your ownership interest in the property. As a result, the effect of the application of the formula for this asset is that no exemption would apply.

CGT interest 1b

CGT interest 1b was acquired by your relation at the time of her/his spouse's death after 20 September 1985. The 'non-main residence days' are the sum of the number of days in your relation's ownership period when the dwelling was not their main residence (if there are any) and the number of days in the period from their death until your ownership interest in the property ended (the settlement date). The 'total days' are the number of days in the period from the acquisition of the ownership interest by the deceased (the spouse's date of death) until your ownership interest ended (the settlement date of the property).

However, because this ownership interest in the property was acquired by your relation after 20 September 1985 as a beneficiary of a deceased estate, the 'total days' and 'non-main residence days' need to be adjusted under section 118-205 of the ITAA 1997.

To modify the formula, 'total days' is adjusted by adding the fewer of:

• the number of days between 20 September 1985 and the day the ownership interest passed to the most recently deceased (the date of your relation's spouse's passing); and

• the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of the deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased (0 days).

In this case, the number of days calculated under the latter option is nil (based on the information you have provided). Although nil is less than the number which would be calculated under the former option, it is considered that the comparison required by the legislation is between two positive numbers of days, otherwise the provisions do not operate as intended. Accordingly, the number of days between 20 September 1985 and the date of your relation's spouse's passing should be added to the 'total days'.

'Non-main residence days' is adjusted by adding to it the number of days that the dwelling was not the main residence of one or more:

• an individual who owned the dwelling at the time of the individual's death; or

• their spouse (except a spouse who was living permanently separately and apart from the individual), or

• an individual who had a right to occupy the dwelling under a will, or

• an individual to whom an ownership interest in the dwelling passed as a beneficiary in a deceased estate.

If the dwelling was either the main residence of the first deceased (your relation's spouse) or your relation from the time they acquired the dwelling until the first deceased's death, there are no non-main residence days required to be added to the formula.

You can then use the discount method to calculate your capital gain for both interests as you meet all the relevant criteria.

Cost base of an asset acquired from a deceased estate

If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base. These rules apply in calculating any capital gain or capital loss when a capital gains tax (CGT) event happens to the dwelling.

The first element of the cost base or reduced cost base of a dwelling - its acquisition cost - is its market value at the date of death if:

• the dwelling was acquired by the deceased before 20 September 1985,

• the dwelling passes to you after 20 August 1996 (but not as a joint tenant) and it was the main residence of the deceased immediately before their death and was not being used to produce income at that date, or

• the dwelling passes to you as the trustee of a Special Disability Trust.

In any other case, the acquisition cost is the deceased's cost base or reduced cost base on the day they died.

Therefore, the first element of the cost base of CGT interest 1a will be the market value of the asset at the date of your relation's death. However, because your relation acquired CGT interest 1b after 20 September 1985, you inherit her/his cost base of the asset (so the first element of the cost base of CGT asset 1b will be the cost base of the asset at the date of your relation's death). Because they inherited this interest from their spouse who acquired it before 20 September 20YY, the cost base of CGT interest 1b at the date of death is the market value of the asset at the date of the death of their spouse.

Because your ownership interest in the property is not to the entire asset, the first element of the cost base will also need to be apportioned between each of the beneficiaries.

Your share of the property expenses can form part of the cost base as long as they meet the criteria of the other elements of the cost base. Please note that your share of property expenses for your additional interest in the property (the one sixth ownership interest you inherited from your sibling) are not included as this interest in the property is already fully exempt from CGT.